incubators are a ghetto

Update: Following up to all the conversations, I’ve had about incubators and Silicon Valley since last week, I didn’t mean to imply ‘a list’ or that there are not other incubators besides YC, TechStars and 500 Startups that create value. Though, like most things, I think the tendency is a Pareto Distribution. I would also like to point out that there is nothing wrong with programs that are not explicitly designed to help companies get investment, just don’t mention investment as a central feature in marketing the program.

The way for anyone to establish that value is to provide transparent expectations and data about their program. Done.

There has been an explosion of incubators in the last few years. Most of them suck. Some suck so bad that the net value created by the program is probably negative. I’m not going to name names. This is just about results.

Let’s start with a story. There are minor variations, but I’ve seen it played out in real time more than once in the last few years. The story goes like this. An incubator has a class of companies, they give them a little cash, they have a weekly session with a mentor or whatever, time goes by, demo day, no one gets funding, fail, fail, FAIL.

what’s wrong

They tried to copy the Y Combinator model, and by ‘copy’ I mean cargo cult. They performed the outwardly obvious ceremony, but didn’t understand and thus couldn’t replicate the mechanics of cause and effect.

Y Combinator has had impact on the dynamics of startup formation and funding not because of the exact details of a program.  But the details are what cargo culters can see: three months, a dollar figure, weekly sessions, gogogo, demo day… the end , most of the companies dissipate.

To be successful an incubator has to do two things. First, create companies that are actually fundable, second, get them an audience with investors interested and able to fund. That’s it. That’s all. Connect the dots. Success.

create companies that are actually fundable

To accomplish the first, you can look at details like Paul Graham’s judgement of people and ideas, or Brad Feld’s numbers and analysis, or Dave McClure’s hustle and passion. You can look at the program, and the mentors. You can talk about lean startup pivots or vision or whatever. At the end of the day, there is a fairly narrow band in the total spectrum of business opportunities that are venture fundable (though that band still represents infinite opportunities). If through whatever process of filtering, coaching and pivoting, the resulting companies don’t represent an opportunity for plausible venture returns, then by definition those companies will not get funded.

The fundability is also a function of how the opportunity is represented. Raising a round of funding is telling the story of your company to a particular audience. If you can’t connect the right dots for the investors, they probably can’t connect them for you. I literally grimace when I meet founders who have come through these programs and don’t understand how to discuss the addressable market, the go-to market, let alone term sheets. The point is that a company is only as fundable as they are able to tell the story that they are fundable. And that skill is something that many incubators fail to teach. Which is a segue to what has to be in place to accomplish the second: get them an audience with investors interested and able to fund.

the network: the only thing that’s real

The traditional venture model ran on warm introductions. If you have an incubator that can’t make that hand off personally, or get the right audience in the room for demo day, then the value of the program is severely limited. So much, that I’d argue for what you trade in equity for the amount of money, the founders’ time would be better spent reading through Venture Hacks or ‘The Business of Venture Capital‘, and then hustling to social engineer introductions themselves.

As much as anything that’s what the successful incubators are leveraging. YC leverages the personal connections and reputation of Paul Graham et al. Dave McClure is PayPal Mafia. He knows people and more importantly, people know Dave. These programs, through the network of people involved, can make introductions to dozens of individuals who in many cases MUST fund startups. That is a competitive advantage.

out of the ghetto: advice for founders

What can be done?

If you are a founder looking at a program that hasn’t had at least 50% of the previous companies funded, you might reconsider the options. You may have a good experience and learn some things, but there is an opportunity cost. If your life’s mission is really to make something amazing happen with your idea and you have the resources to devote your time to that, then what are you waiting for. If the time spent and the equity traded isn’t going to open more doors for you than just working on the code and angel list, then that program might be a setback, because you’ll just have to do those things anyway and you won’t have the burden of sorting good advice from the bad. You will also inevitably be judged by the quality of companies you stand next to, at least in the context of the program.

If you can go to YC, Techstars or 500 startups, you should. I would. You’ll learn things and get a tiny bit of money, but the connections you make to the network of founders and mentors is what will make all the difference. That’s the fat head of the incubator distribution. I’m sure there are others that add value in the middle, but I want to encourage people to be aware of what you are getting into and for what. In addition to the time and equity commitment, be sure to get more data and weigh the options and benefits.

  • How many companies have been through the program and how many got funded?
  • Who are the mentors in the program and what are their backgrounds?
  • Can you get in contact with people who have been through the program? Especially founders that failed.
  • What are the other options? (for example, building something)

unsolicited advice for the well intentioned incubator

If you run an incubator and your earnest concern is the creation of value, this is my unsolicited advice. (Remember, there’s just two things you need to do, create fundable companies, get them in front of investors.)

  • If your companies aren’t getting funded, take it personally. Look at what your program creates and the relationships that are being built with investors.
  • If no one involved has ever been funded, that’s a problem. If nearly everyone involved hasn’t been funded or is in a position to fund, that’s a problem. Fix it. You have very little hope to create fundable companies otherwise.
  • The companies should be getting as many questions from you as they are answers, probably more… a lot more. Of course, that’s predicated on knowing the right questions to ask.
  • The incubator needs to be building relationships with investors as much or more than any of the companies. If no one running an incubator has or can build those relationships, how can they can help a company build relationships?

There will always be advantages in resources and relationships. That’s how the world works. Understanding that is the first step to gaining those advantages. Hope that helps.

tl;dr if an incubator is run by people who have never run a start up, never successfully pitched venture or haven’t got the cash on hand plus the risk tolerance to make considerable investments, the companies that accomplish anything will be in spite of the program rather than because of it. Some of these incubators appear to be nothing but a hobby for individuals of relatively high net worth, often having had nothing to do with venture investment in the past, to tell their war stories filtered through survivor bias to founders who have to build companies in an environment different from anything their mentors have ever experienced. The resulting bad advice and misguided effort may be a net negative for all involved, the founders and investors.

addendum: After writing this I found this, which could potentially be a useful for collecting and comparing data. There is a link there  to a post and literal dissertation on forming seed accelerator programs and a follow up to that. Jed Christiansen provides a thoughtful treatment of the subject with sound advice, but the primary focus is how to make an incubator appealing to the entrepreneur, while follow on funding is mentioned in passing as a complication. Venture funding is a pull system, there has to be explicit signals to pull and someone to do it. (if you don’t know what a pull system is, see me after class)

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35 responses to “incubators are a ghetto

  • brendanbaker (@brendanbaker)

    While I think there’s a large component of pure product/startup growth (irrespective of fundability) that can come with accelerators, I agree with most of your opinions. More importantly, I agree with the underlying vibe that accelerators should/will be more accountable for their contributions moving forward. Unfortunately, we need to get through this current explosion before we get there.

    Good post/rant, thanks.

  • Mukund Mohan

    I agree with the two things that matter to be a successful incubator, but there are several entrepreneurs who want to go through the experience of learning to put together a GTM strategy, or a distribution model or learn how negotiate a term sheet. The fact that they get funded (for a few of them) or not their primary goal.

    It may also be a case that your headline is intentionally provocative to get the desired reaction, but it comes off as very “condescending”.

    • stochasticresonance

      @Mukund

      I’m judging programs by their own marketing. Also, if your goal isn’t to build an amazing company, then you shouldn’t call yourself an entrepreneur. I support dabbling and learning everything you can along the way, but if you aren’t trying to build a company, what exactly are you incubating? There are more direct ways to learn all those things individually.

      I’m not sure if you are familiar with the ‘is a ghetto’ meme, but title is cliche and hyperbolic. That was by design. I’m not clear why you feel that is condescending, but I didn’t mean to be offensive so much as give the information an opportunity to get exposure.

  • Dave Snyder

    Brilliant post. People judge most concepts on their surface layer, completely missing the structural foundation. The “if we build it they will come” mentality is pretty absurd.

    I also majorly respect incubators that are willing to stat niche and focus on what they know. Brings immense value via mentorship.

  • John

    You should come and give this lecture in Singapore. :-)

    • stochasticresonance

      @John

      That could be arranged. I happen to have several friends and a cousin living in Singapore. I haven’t been to Singapore yet, but I made it to Asia seven times last year.

  • Rob

    You praise ycombinator and techstars… but 500 startups?? What’s Dave McClure but a loud barking dog? Is he anything but noise and sales/marketing bs? Savvy investors are weary of this buffoon and his followers. Was he anything but a barker in anything he did in his career? shockingly no. Remember like attracts like… and the world has decreasing patience for this mentality. Might work sometimes, but not for the long run, and this guy is all about flipping and exploiting for self gain. And how is that congruent with role modeling for startup success?

    • stochasticresonance

      @Rob

      Harsh judgement on Dave McClure.

      First of all, noise is necessary. Sales and Marketing win. See Also: every competitive technology adoption ever

      I first met Dave at Foo Camp in 2008, before this tech cycle really started to take off. He gave us clear and meaningful advice about Puppet and took nothing in return.

      I’m sure there are some who might find Dave a bit over the top, but I’ve never heard him make a comment or ask a question that I didn’t think demonstrated some insight if not genuine concern. There might be someone out there as a counter example, but I’ve never heard people that work with Dave say bad things about him. I don’t agree with everything Dave says, but I do admire his hustle. If anything, he’s probably spread himself too thin, but he’s definitely going for it with passion his way and I that is something I respect and admire.

      At the end, it all comes down to results. If 500 startups builds an ecosystem that creates value for founders, Dave wins. If 500 startups doesn’t, then we’ll all see it very publicly. Until I see any evidence to the contrary from people Dave has worked with, I believe the available evidence shows Mr. McClure creates more value than he captures.

      I have been wrong before.

      • dave mcclure

        thanks for the support, and agreed… we will either succeed or fail quite publicly, so you’ll likely get to watch the train wreck if we don’t make it.

        (and I’m quite happy to be the useless barking dog… dogs are dependable and useful creatures, who are fun and lovable. I have no problem with that label :)

        the one thing I do disagree with here is the concept of incubators as only helpful for “lesser” entrepreneurs. this is patently false. while many founders may not choose this model (and we invest in businesses that go thru our program, YC, TechStars, others, or none at all), we have example after example that demonstrates the utility of an environment where many experiments are going on & where shared learning is accelerated by close proximity.

        regardless, as you mention, we are happy to let the results speak for themselves.

        woof , woof.

        DMC

  • Brian Mesic (@brianmesic)

    I’ve been watching the explosion of incubators and have the same view. Graduating companies without financing = fail (generally).

    I have been to one Y-combinator demo day. I was blown away. First, the pitches were almost universally well done (though formulaic). Second, the “hit rate” of business I found interesting was high. Finally, and most importantly, there was an incredible audience of VCs.

    If the new incubators can find enough high quality companies and prepare them well, the investors will come. But are there enough compelling startups to fill the available inventory of incubator slots? Without consistency and scale, it will be tough to get a critical mass of investors to show up on graduation day.

    • stochasticresonance

      @Brian

      correct, if programs can’t consistently produce fundable companies who can sell the story, why would investors want to waste time?

  • Josh Ledgard

    I agree that if you are rejected by one of the big three… just try it alone. It can work. http://www.kickofflabs.com was rejected in the final round by Techstars… but it’s becoming a real business now. :)

    • stochasticresonance

      @Josh

      I’m not saying you can’t get value from other programs, just that you should understand what and why you are going to get something from the time and effort spent. Some of these incubators have the pieces they need to build value, they just aren’t playing them optimally imho.

  • jon bradford

    As a founder of the successful accelerator Springboard based in Cambridge and London (with >50% of teams getting funding), I agree with many of your points – ultimately there needs to be greater transparency around the results being achieved.

    However, we are left with the dilemma that raising additional funding is considered to be THE measure of success and does not encourage businesses to bootstrap – which should not be discouraged and in some instances it should be encouraged.

    • stochasticresonance

      @jon

      Good point, I fully agree with you. Success can be defined many ways and context matters.

      For me, I think this comes down to setting proper expectations and imparting information and/or resources to achieve goals. I probably came across bias towards funding in the post, but this is a reaction to how many of the programs position themselves. Understanding and executing a bootstrap-able opportunity is just as valid a success criteria as executing a fundable one. These are also not mutually exclusive, especially when considering timelines.

      Ultimately, I think it is fair to leave the definition of success criteria up to the program and the founders. The point I am making is this is often not achieved for either party.

      • jon bradford

        I did not take your approach as bias toward funding. It is an easy and obvious measure and works if programmes are willing to be transparent about their results. Equally I do not believe bootstrapping and funding are mutually exclusive – however sometimes I do get frustrated by startups desire to raise funding rather than building a business.

      • stochasticresonance

        yes, this can be especially toxic when the funding becomes the mental ends, not a means to a greater end.

  • Sean

    Great post, well articulated. Would add Seedcamp to your list of A-list incubators. Think many of the plethora of new incubators might have a better shot at creating sustainable value if they focused on a specific niche. Key is to be able to deliver value that would otherwise be hard or impossible for the entrepreneurs to gain. And as you point out in a world of Venturehacks etc. this bar is continually being raised (ie a smart, resourceful entrepreneur can get further and further on her own…)

  • JasonJack

    Decent rant, but lost me at putting 500 Startups up as a model. They are unproven and not sure if Dave can close another fund due to his strategy and lack of results. I assumed that you’re not living in Silicon Valley, so you put Dave somewhere where he doesn’t belong… yet.

    • stochasticresonance

      @Jason

      I could be.

      I don’t live in the Bay Area, but I’ve been there on average about 10 times a year since 2008. I’m more connected to the tech scene than the investment side, but I try to pay attention.

      I could be totally wrong. As I said before, Dave may be spreading himself too thin. 500 Startups may be too early to tell, but from where I sit, they are hustling and the mentors are generally people who know how to build, know what fundable means and/or can write checks. It takes time for a network to expand. On paper, 500.co doesn’t look to be less developed than YC circa 2007 give or take. Generally, I would expect most opportunities to take 3-5 years to develop. 500 Startups needs one big success out of all the opportunities and all of a sudden Dave will be looking like a genius.

      Like, I said I could be wrong on this specific detail, but I don’t bet against hustle.

  • Justin Mares

    I’m starting an incubator focused on college students as a way to expose them to quality mentors and get the experience/skills that come from running a startup. It has more of a relationship and skill development focus than a traditional incubator, and I’d really appreciate your thoughts. Any chance we could talk via email?

  • Jeffrey Young

    What you say is the same old same old: who you know is what counts. I agree. But your other point needs much more elaboration: It is the story stupid! Most start-ups and their friends and family think that if they can tell a good elevator pitch, they’re home free. But that is the least important part of the story. The real point is to rip your story apart, based on some kind of marketplace due diligence and the reactions of kids/unwashed listeners without any reason to like your idea. Then rip it apart again and again. Just like editing–it may not be pleasant but the real work of writing is in rewriting. Just nowhere near as glamourous…

    • stochasticresonance

      @Jeffery

      You are correct that there is a lot on that topic to be expanded, but I didn’t want to post about how to pitch.

      There is a lot of that available already.

  • TechonomicMan

    I enjoyed your rant here very much and have occasionally blurted out some of the same thoughts, but not with the same completeness as you have done. My only criticism of your entire piece is that I’d respectfully ask that you do a “search and replace” of the word “incubator” for “accelerator”. Ben Franklin Technology Partners in Pennsylvania has been running a true “incubator” since 1983. Correct, 1983. We’ve always been about building companies of lasting value and I’ve personally resented the hijack of the word incubator for these more cursory and fleeting accelerators focused on “the funding” as the end goal rather than focused on “building intrinsic business value”. Our program, too, was copied many times over the decades. The mechanics of models can be copied, but not the character…it’s about the people behind the model.

  • Steven Collens

    Interesting column and perspective on what is clearly a growing and important piece of the entrepreneurial ecosystem. And while there are lots of ways to measure the success of incubators and accelerators, the ability of graduating companies to fundraise is nicely tangible. On that point — Excelerate Labs in Chicago has knocked it out of the park. 80% of their 2010 graduates had successful raises. Their 2011 class is still going through the fundraising process, but is looking good. They’ve also done a great job of curating mentors and providing an experience that accomplishes what it’s intended to do — accelerate the growth of new ventures. I’d add them to your list of top-tier programs!

    • TroyHenikoff (@TroyHenikoff)

      Steve,

      Thanks for the vote of confidence – Excelerate is the benefactor of a confluence of events coning together in the Chicago ecosystem – Great mentors that want to give back by helping new companies, a lot of early stage capital available, a ton of talent (some great universities and a couple of the best business schools in the country) and most importantly a community that has come together to help make it successful. The amount of new entrepreneurial activity in Chicago is just astounding!

      – Troy Henikoff – Excelerate Labs

  • Daniel Cole

    I’m astonished at their sales pitch:

    We’ll give you a desk for 10 weeks, $6K, and a few former ‘fortune 500 mentors’ and in return we only take 7% of your company.

    Holy crap! 7% equity! I would rather bring on another co-founder who will work tirelessly to make my company a success.

    As for me; I’d rather spend time talk to customers and coding. When the product is compelling and traction exists investors will not be hard to find.

  • William Brah

    Here’s a tally of results from the leading incubators/accelerators in Boston:

    Serious money being pumped into startups at Boston’s incubators!

    http://blogs.umb.edu/vdc/2012/02/17/serious-money-being-pumped-into-startups-at-bostons-incubators/

    For years, Boston didn’t think it needed incubators. Now they are springing up like weeds. The three leaders are achieving solid results, but still looking for one big success match the performance of YCombinator.

  • Matt Greenfield

    I don’t know the stats for Dave McClure’s accelerator’s graduates, but I have seen the numbers for his first fund, and it is indisputably a winner, way ahead of venture industry norms.

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